BALTIMORE – Here’s an opportunity for you, dear reader…
A Los Angeles spec house is on the market. It has seven bedrooms and 20,000 square feet of living space.
It comes with a gold Lamborghini Aventador and a gold Rolls-Royce Dawn.
You also get a wine cellar, a pool, and the usual claptrap amenities to which rich people are easy prey.
The price? A hundred million dollars.
Oh, and it comes with some of Damien Hirst’s oeuvres, considered by some to be “art.”
The builder says he has another one under construction in Bel-Air that he plans to offer for $500 million.
What do we make of this?
Who knows? But you don’t get this kind of bombastic extravagance at the bottom of a boom/bust cycle. You get it at the top.
The risk of a crash and/or recession has been with us for years. But it seems to be intensifying.
Real estate indexes show prices back to their 2006 all-time highs. House flipping, too, is almost back where it was at the peak, with about 6% of sales attributed to flippers compared to about 7% in 2006.
For old commercial space, the picture is darkening fast. Bloomberg:
A tidal wave of store closures is about to hit the U.S., and the result could be catastrophic for hundreds of lower-tier shopping malls.
J.C. Penney announced Friday that it would close up to 140 stores in the next couple months.
That follows decisions by Macy’s and Sears to close a collective 218 stores in the first half of the year. Other mall-based stores including American Apparel, The Limited, Bebe, BCBG, and Payless have also recently announced that they are shutting down all or most of their stores.
Or take a look at the CAPE ratio for the S&P 500. It looks at stock prices relative to the average of the past 10 years of inflation-adjusted earnings to “smooth out” year-to-year fluctuations in earnings.
By this measure, stocks have only been more expensive in 1929, 1999, and 2007 – all before major crashes.
There is particular extravagance in the tech market, where Fortune magazine counted 175 “unicorns” – unproven new companies said to be worth more than $1 billion – in 2016.
One of them is appropriately named Farfetch. It is a London-based website hosting, well, clothes.
According to The Economist, “Farfetch emphasises its bricks and mortar boutique roots,” allowing independent retailers to “keep their identity, while boosting their position in the market.”
It has never earned a dime…
Meanwhile… S&P 500 profits have been going down for the last five consecutive quarters and are now lower than they were four years ago.
And the outlook is bad. Whatever gains might be anticipated by lower business taxes will almost surely be overshadowed by higher labor costs and squeezed margins.
In some industries – like agriculture and construction – undocumented immigrants do more than 10% of the work.
Farmers will be especially hard hit. Their exports will be trimmed by a stronger dollar and retaliatory trade barriers. And their costs will rise as the lowest-cost labor disappears.
The number of hours worked is going down, too. So are real wages.
Half of Americans are already living paycheck to paycheck. With smaller paychecks, they will have to cut back spending fast.
Auto loan delinquencies are higher than they’ve been since 2008. Used car prices are 10% below their level three years ago.
New car sales are stalled. Dealers have increased discounts by more than 20% in the last year.
Another sign of desperation: People with bad credit are signing up for more credit cards. This from the Fed:
Nearly half of all card closures in 2010 and 2011 belonged to borrowers with credit scores of 660 and below [with anything below 660 raising red flags], although they comprise only 33% of card borrowers. Reversing the sharp net decline in the number of credit cards during 2008-10… in recent years, the level of new card issuance to this group has been strong and is now approaching pre-recession levels.
And for the first time in 10 years, Federal Housing Administration mortgage delinquencies are rising.
Student debt passed the $1.3 trillion mark.
Consumer bankruptcies rose last month.
The trade deficit is back to 2008 levels.
And finally, inflation is rising. Officially, it is 2.5% for the last 12 months. Other measures put it much higher. Remember, the whole system depends on low interest rates… which depend on low inflation rates.
Panic? Not yet. But here at the Diary, this is Crash Awareness Week.
BY CHRIS LOWE, EDITOR AT LARGE, Bonner & partners
The Trump rally is one for the record books…
There have been 72 trading days since Donald Trump’s victory over Hillary Clinton on Election Day.
Over that time, the S&P 500 is up by 10.5%.
It’s the second-best performance over a comparable period for a newly elected president since John F. Kennedy was in the White House.
Over the first 72 trading days since JFK was elected, the S&P 500 rose by just over 13%.
– Chris Lowe
The U.S. Is in Real Trouble
America is headed for something much more serious than any past crisis… And it will be much worse – and last much longer – than people expect…
Bonds Suck Right Now
At current yields, it’s hard to imagine any scenario where bond returns don’t suck. Although the risk-free return of cash isn’t great, it may be better than the return-free risk bonds offer.
Why Warren Buffett Is Still Betting on America
Billionaire investor Warren Buffett’s latest shareholder letter went out. And he reckons it’s “virtually certain” that U.S. stocks will be worth more in the years ahead.
In Thursday’s Diary, Bill reminded us that the economy is a learning machine. And that very little learning can be done when America is in a druggy stupor. And it’s struck a chord…
Great article, Bill! Drugs and prison (crime) are at epidemic levels. Add illiteracy and immorality, and you have the makings of all it takes to degrade and destroy a civilization. The problems are easy to identify – the solutions take a little more blood, sweat, and tears.
And if anyone had a solution, they would probably be under attack by those who profit from the four scourges just mentioned. Are you curious about where to find some solutions? If you had a good solution, who would you tell? Who would listen?
It is sort of like voting for Trump – if you did vote for him, let’s hope not too many people find out.
– Drew J.
For your ranch problems, I would recommend getting in touch with Geoff Lawton out of Australia. He uses a system called permaculture for sustainable agriculture. He has a couple of projects operating in Jordan, with less rain than I think you’re talking about. He has success with his systems in a wide variety of conditions.
– Dale Y.
Meanwhile, some positive feedback for Bonner Private Portfolio chief investment strategist Chris Mayer. Chris filled in for Bill in the most recent issue of Bill’s monthly publication, The Bill Bonner Letter. (Paid-up subscribers can access it here.)
Chris did a great job filling in for Bill. We miss Bill, but I think if Bill ever gives up his writings, Chris could step right in. Thanks.
– Joe E.
Chris… Great job… You are a true asset as Bill’s DH! Thanks for the great read.
– Fred S.